National Australia Bank boss Cameron Clyne has declared households and businesses are in a ''funk'', which threatens to derail progress in the transition from an economy driven by resources investment.

In his final profit result as chief executive, Mr Clyne on Thursday sounded a cautious note on the economic outlook, saying there needed to be a circuit-breaker to make consumers and businesses more confident about investing.

Yes there are issues of transition but we just don't seem to be able to break out of this funk, of this confidence trap that we seem to be caught up in

It came as NAB delivered half-year result that was below expectations, with cash earnings rising 8.5 per cent to $3.15 billion in the March half, helped by a sharp fall in bad debts.

Reflecting the bank's more cautious stance than some of its peers, Mr Clyne argued NAB had been deliberately reducing risk in its flagship business lending arm, even if this came at the expense of market share.

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Amid expectations of a tough budget, he warned about the dangers of excessive pessimism when the economy was ''fundamentally pretty sound,'' evidenced by recent signs of improvement in the labour market.

''Yes there are issues of transition but we just don't seem to be able to break out of this funk, of this confidence trap that we seem to be caught up in,'' Mr Clyne told journalists.

"There is going to have to be at some point a trigger that gets businesses and consumers more confident in investing.''

As official figures showed the unemployment rate remained unchanged last month at 5.8 per cent, Mr argued the economy was making gradual progress, but this could be undermined by too much negativity.

''The danger we've got is we keep wanting to talk ourselves into a situation that's far worse,'' he said.

The comments come before a budget that is expected to include a ''deficit levy'' for higher income earners and deep cuts to spending.

Mr Clyne would not comment on expected budget measures but said it would be a ''tricky one'' for the government because it needed to balance long-term savings, without derailing confidence in the longer-term.

In a trend that has boosted bank profits across the board, NAB revealed a sharp fall in its bad and doubtful debts, which fell 37 per cent in the half to $528 million.

It also joined the rush to raise payments to shareholders, increasing the fully franked interim dividend by 6c to 99c a share, due to be paid on July 8.

Key reasons for the lift in credit quality were improvements in its troubled British loan portfolio and its Australian business lending arm.

However, Mr Clyne was more cautious than Westpac boss Gail Kelly this week on the prospect of a bounce in credit growth, with businesses still needing a ''trigger'' to invest more. ''The big issue now is does the up-tick in business confidence translate into business activity,'' he said.

Market analysts said it was a ''low quality'' result, due to the big role that lower bad and doubtful debts played in boosting the bottom line.

Its net interest margin – a gauge of banks' cost of funds compared with what they charged for loans – also fell 9 basis points to 1.94 per cent amid fierce competition in home and business lending.

Deutsche Bank analyst James Freeman also highlighted that earnings from its domestic lending arm were softer than ANZ and Westpac, alongside a fall in business lending market share.

''While we see the result as disappointing, the stock has underperformed materially in recent weeks, which may limit the downside,'' Mr Freeman said in a note to clients.

While earnings were softer than the market expected, NAB's capital levels strengthened to 8.64 per cent per cent of assets.

The bank said it would aim to have capital of 8.75 per cent to 9.25 per cent by 2016 in response to new rules. Mr Freeman said this target would create a ''big capital bridge to cross in coming periods.''

NAB's share price fell in early trade but finished the day 0.9 per cent higher, at $34.14.